If you believe, as I do, that little things can mean a lot, then you should be interested in finding low-risk ways to gain an edge and tease out some extra performance from your investments.

Even if you've built a properly diversified mutual fund or ETF portfolio at Vanguard, there's another bit of fine-tuning you can do to bump up your expected returns without adding significant risk.

In blunt terms, you may be able to make more money.

My Vanguard recommendations call for diversifying the equity part of your portfolio into 10 asset classes: U.S. large-cap blend, U.S. large-cap value, U.S. small-cap, U.S. small-cap value, U.S. REITs, international large-cap blend, international value, international small-cap, emerging markets, and international REITs.

The fine-tuning I want to discuss here involves U.S. small-cap value, a great asset class with a strong record of superior long-term performance.

Vanguard's Small Cap Value Index Fund
VISVX, +1.23%
is an excellent vehicle for this asset class; the same is true of Vanguard Small-Cap Value
VBR, +0.02%
the Vanguard exchange-traded fund that mirrors this mutual fund. So you might wonder, as many other readers have wondered, why my ETF recommendations specify something different.

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In fact, the most common question I get regarding my ETF recommendations is why I chose Vanguard Russell 2000 Value Index instead of VBR for the small-cap value slot. One person told me he asked Vanguard about this and was told they are basically the same fund.

I disagree. These two ETFs represent the same asset class, but one does it considerably better than the other. To understand why, we must look at the numbers.

Using data I found at Morningstar, I'll break down the comparison piece-by-piece so you can follow it more easily.

Average market capitalization (essentially the size of a company): VBR's is $2.8 billion, more than twice the $1.3 billion of VTWV. This means the "small" is much smaller in VTWV. Smaller companies have higher long-term expected returns.

Percentage of microcap stocks: VBR has 8.9%, vs. 35.5% in VTWV. Here again, smaller is expected to be better. Here's another way to see this difference: Remember this is a small-cap asset class. VBR has 40.5% of its portfolio in midcap stocks versus only 5.2% for VTWV.

Value orientation: This is also a value-driven asset class; the lower the price-to-book ratio, the deeper the value discount (in other words, the cheaper one can buy the stock). The price/book ratio of VBR's portfolio is 1.71; VTWV's portfolio is more heavily discounted at 1.42.

Risk: As measured by the three-year standard deviation, the two ETFs are pretty close. VBR's was 15.8; VTWV's was 16.3.

The logical question here is: Since return is what investors ultimately want, why go for a fund with a lower return?

Again, the answer is in the numbers. Three years is too short a time to conclude very much about the future. I'm interested (and you should be too) in the long term, not just a few recent years.

Because VTWV doesn't have a long-term track record of its own, we need to look at comparable funds to see what we can infer. (This isn't phony; it's akin to some of the ways that astronomers measure things that they can't see directly.)

We have two small-cap value funds we can study, and they have both been around for more than 15 years.

The Vanguard Small Cap Value Fund (VISVX) has a portfolio that is mirrored by VBR (with the same numbers that I quoted above).

The DFA U.S. Small Cap Value Fund (DFSVX) has a higher expense ratio (0.52%), but otherwise its numbers are more like those of VTWV than those of VBR.

In the DFA fund
DFSVX, +1.61%
the average market capitalization is $1.3 billion. Midcap stocks represent only 7.1% of its portfolio, and microcap stocks take up 35.1%. This fund's value discount is even deeper than that of VTWV, with a price-to-book ratio of 1.31.

Morningstar calculates the 15-year returns for these funds every day. A recent comparison was 11.4% for the DFA fund versus 9.8% for VISVX.

At the start of this discussion, I said little things can mean a lot. This difference, 11.4% versus 9.8% compound return, resulted from some "little" things that the DFA fund did. It invested in smaller companies and had a greater value orientation.

And even though its expenses are significantly higher (0.52% versus the Vanguard fund's 0.09%), the DFA fund clearly outperformed during the longest period in which we can compare it to the Vanguard fund.

The difference between 9.8% and 11.4% isn't overwhelming in any single year. But compounded over 15 years, that difference really adds up. On an initial investment of $10,000, it's the difference between $40,648 and $50,498. That is an increase of nearly 25%.

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